Strategic Management Module 5 Lecture 2

Prof. Murali Murti Jul-Nov 2012

6
Supplementing Chapter Title the Chosen Competitive Strategy
16/e PPT
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Fig. 6.1: A Companys Menu of Strategy Options

Module Roadmap

Collaborative Strategies: Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies: Operating Across More Stages of the Industry Value Chain Outsourcing Strategies: Narrowing the Boundaries of the Business Offensive Strategies: Improving Market Position and Building Competitive Advantage Defensive Strategies: Protecting Market Position and Competitive Advantage Choosing Appropriate Functional-Area Strategies First-Mover Advantages and Disadvantages

Collaborative Strategies: Alliances and Partnerships

Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership.

Alliances Can Enhance a Firms Competitiveness

Alliances and partnerships can help companies cope with two demanding competitive challenges

Racing against rivals to build a market presence in many different national markets

Racing against rivals to seize opportunities on the frontiers of advancing technology

Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities

Characteristics of a Strategic Alliance

Strategic alliance A formal agreement between two or more separate companies where there is

Strategically relevant collaboration of some sort Joint contribution of resources Shared risk Shared control Mutual dependence
Joint marketing Joint sales or distribution Joint production Design collaboration Joint research Projects to jointly develop new technologies or products

Alliances often involve

What Factors Make an Alliance Strategic?

It is critical to a companys achievement of an important objective It helps build, sustain, or enhance a core competence or competitive advantage It helps block a competitive threat It helps open up important market opportunities

It mitigates a significant risk to a companys business

Why Are Strategic Alliances Formed?

To collaborate on technology development or new product development To fill gaps in technical or manufacturing expertise To create new skill sets and capabilities

To improve supply chain efficiency

To gain economies of scale in production and/or marketing

To acquire or improve market access via joint marketing agreements

Potential Benefits of Alliances to Achieve Global and Industry Leadership

Get into critical country markets quickly to accelerate process of building a global presence Gain inside knowledge about unfamiliar markets and cultures Access valuable skills and competencies concentrated in particular geographic locations Establish a beachhead to participate in target industry Master new technologies and build new expertise faster than would be possible internally Open up expanded opportunities in target industry by combining firms capabilities with resources of partners

Capturing the Benefits of Strategic Alliances

Benefits from forming partnerships are a function of

Picking a good partner Being sensitive to cultural differences Recognizing an alliance must benefit both parties

Ensuring both parties live up to their commitments

Structuring the decision-making process so actions can be taken swiftly when needed Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances

Why Alliances Fail

Ability of an alliance to endure depends on

How well partners work together Success of partners in responding and adapting to changing conditions Willingness of partners to renegotiate the bargain Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies

Reasons for alliance failure

Test Your Knowledge

Which one of the following is not a factor that makes an alliance strategic as opposed to just a convenient business arrangement?
A. The alliance involves joint contribution of resources, shared risk, and is mutually beneficial. B. The alliance helps block a competitive threat or open up new market opportunities. C. The alliance helps mitigate a significant risk to a companys business. D. The alliance helps build, enhance, or sustain a core competence or competitive advantage. E. The alliance is critical to the companys achievement of an important objective.

Merger and Acquisition Strategies

Merger Combination and pooling of equals, with newly created firm often taking on a new name Acquisition One firm, the acquirer, purchases and absorbs operations of another, the acquired Merger-acquisition strategy

Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

Objectives of Mergers and Acquisitions

To create a more cost-efficient operation To expand a firms geographic coverage To extend a firms business into new product categories or international markets To gain quick access to new technologies or competitive capabilities To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities

Pitfalls of Mergers and Acquisitions

Combining operations may result in

Resistance from rank-and-file employees Hard-to-resolve conflicts in management styles and corporate cultures

Tough problems of integration

Greater-than-anticipated difficulties in

Achieving expected cost-savings Sharing of expertise Achieving enhanced competitive capabilities

Vertical Integration Strategies

Extend a firms competitive scope within same industry

Backward into sources of supply

Forward toward end-users of final product

Can aim at either full or partial integration

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

Strategic Advantages of Backward Integration

Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Potential to reduce costs exists when

Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met

Can produce a differentiation-based competitive advantage when it results in a better quality part Reduces risk of depending on suppliers of crucial raw materials / parts / components

Strategic Advantages of Forward Integration

To gain better access to end users and better market visibility To compensate for undependable distribution channels which undermine steady operations To offset the lack of a broad product line, a firm may sell directly to end users To bypass regular distribution channels in favor of direct sales and Internet retailing which may

Lower distribution costs Produce a relative cost advantage over rivals Enable lower selling prices to end users

Strategic Disadvantages of Vertical Integration

Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety Poses all types of capacity-matching problems May require radically different skills / capabilities Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

Pros and Cons of Integration vs. De-Integration

Whether vertical integration is a viable strategic option depends on its

Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities
Impact on investment cost, flexibility, and administrative overhead Contribution to enhancing a firms competitiveness

Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!

Outsourcing Strategies
Concept
Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities
Internally Performed Activities

Suppliers

Functional Activities

Support Services

Distributors or Retailers

When Does Outsourcing Make Strategic Sense?

Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantage Risk exposure to changing technology and/or changing buyer preferences is reduced It improves firms ability to innovate Operations are streamlined to

Improve flexibility Cut time to get new products into the market

It increases firms ability to assemble diverse kinds of expertise speedily and efficiently Firm can concentrate on core value chain activities that best suit its resource strengths

Risk of an Outsourcing Strategy

Farming out too many or the wrong activities, thus

Hollowing out capabilities Losing touch with activities and expertise that determine overall long-term success

Offensive and Defensive Strategies

Offensive Strategies
Used to build new or stronger market position and/or create competitive advantage

Defensive Strategies
Used to protect competitive advantage (rarely lead to creating advantage)

Principles of Offensive Strategies

Focus relentlessly on

Building competitive advantage and Striving to convert it into decisive advantage

Employ the element of surprise as opposed to doing what rivals expect Apply resources where rivals are least able to defend themselves Be impatient with the status quo and display a strong bias for swift, decisive actions to boost a firms competitive position vis--vis rivals

Types of Offensive Strategy Options

1. Offer an equally good or better product at a lower price 2. Leapfrog competitors by being

First adopter of next-generation technologies or First to market with next-generation products

3. Pursue continuous product innovation to draw sales and market share away from less innovative rivals

4. Adopt and improve on the good ideas of other companies

Types of Offensive Strategy Options

(cont)

5. Deliberately attack market segments where a key rival makes big profits 6. Attack competitive weaknesses of rivals 7. Maneuver around competitors and concentrate on capturing unoccupied or less contested market territory 8. Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals 9. Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicating

What Is a Blue Ocean Strategy?

Seeks to gain a dramatic, durable competitive advantage by

Abandoning efforts to beat out competitors in existing markets and Inventing a new industry or distinctive market segment to render existing competitors largely irrelevant and Allowing a company to create and capture altogether new demand

Type of Markets: Blue Ocean Strategy

Typical Market Space

Blue Ocean Market Space

Industry boundaries are defined and accepted Competitive rules are well understood by all rivals

Industry does not exist yet Industry is untainted by competition Industry offers wide-open opportunities if a firm has a product and strategy allowing it to

Companies try to outperform rivals by capturing a bigger share of existing demand

Create new demand and Avoid fighting over existing demand

For Discussion: Your Opinion

Give three examples each from the national and international markets of companies that have tried t follow a Blue Ocean strategy.

Choosing Rivals to Attack

Four types of firms can be the target of a fresh offensive

Vulnerable market leaders Runner-up firms with weaknesses where challenger is strong Struggling rivals on verge of going under Small local or regional firms with limited capabilities

Using Offensive Strategy to Achieve Competitive Advantage

Strategic offensives offering strongest basis for competitive advantage entail

An important core competence A unique competitive capability

A better-known brand name

A cost advantage in manufacturing or distribution

Technological superiority
A superior product

Test Your Knowledge

Which one of the following is not a good type of rival for an offensive-minded company to target?
A. Market leaders that are vulnerable B. Runner-up firms with weaknesses in areas where the challenger is strong. C. Small local and regional companies with limited capabilities D. Companies with lower costs and lower prices E. Struggling enterprises that are on the verge of going under

Defensive Strategy
Objectives

Lessen risk of being attacked Blunt impact of any attack that occurs Influence challengers to aim attacks at other rivals

Approaches

Block avenues open to challengers

Signal challengers vigorous retaliation is likely

Block Avenues Open to Challengers

Participate in alternative technologies Introduce new features, add new models, or broaden product line to close gaps rivals may pursue Maintain economy-priced models Increase warranty coverage Offer free training and support services Reduce delivery times for spare parts Make early announcements about new products or price changes Challenge quality or safety of rivals products using legal tactics Sign exclusive agreements with distributors

Signal Challengers Retaliation Is Likely

Publicly announce managements strong commitment to maintain present market share Publicly commit firm to policy of matching rivals terms or prices Maintain war chest of cash reserves

Make occasional counter-response to moves of weaker rivals

Choosing Appropriate Functional-Area Strategies

Involves strategic choices about how functional areas are managed to support competitive strategy and other strategic moves Functional strategies include Research and development Production Human resources Sales and marketing Finance

Tailoring functional-area strategies to support key business-level strategies is critical!

First-Mover Advantages

When to make a strategic move is often as crucial as what move to make First-mover advantages arise when

Pioneering helps build firms image and reputation

Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage
Loyalty of first time buyers is high Moving first can be a preemptive strike

First-Mover Disadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when

When costs of pioneering are more than being an imitative follower and only negligible learning/experience curve benefits accrue to the leader

Innovators products are primitive, not living up to buyer expectations

Demand side of the market is skeptical about the benefits of new technology/product of a first-mover Rapid technological change allows followers to leapfrog pioneers

Strategic Issues: To Be a First-Mover or Not

Key issue Is the race to market leadership in an industry a marathon or a sprint? Seeking a competitive advantage by being a firstmover involves addressing several questions

Does market takeoff depend on development of complementary products or services not currently available? Is new infrastructure required before buyer demand can surge? Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs? Are there influential competitors in a position to delay or derail the efforts of a first-mover?